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Five years of low interest rates

Half a decade of record low interest rates were marked today as the Bank of England once more kept the cost of borrowing on hold.

The five-year anniversary of the monetary policy committee's (MPC) decision to slash rates to the historic low of 0.5% comes amid a protest outside the Bank of England by campaign group Save Our Savers at the impact the ultra-low rates have had on savings pots.

Returns on savings have been slashed, costing depositors of UK banks and building societies £326.3 billion over the past five years, according to the group - although many mortgage borrowers have found themselves hundreds or even thousands of pounds better off than they might otherwise have been.

But the latest decision follows a flurry of recent comments from members of the MPC signalling that rates may rise next year as the economic recovery picks up pace.

It is also the first decision since the Bank abandoned its "forward guidance'' pledge linking the cost of borrowing to unemployment figures.

The new version - dubbed "fuzzy guidance" - will see its decisions on interest rates instead based on how quickly the economy uses up its spare capacity.

The Bank said then that it would give no timing on when interest rates would rise, although market expectations are for this to happen in the second quarter of 2015 - keeping the Bank on track to leave inflation close to 2%.

It has also stressed that when rates rise, the increase will be gradual.

Howard Archer, chief economist at IHS Global Insight, said: "The Bank of England clearly wants to nurture recovery and not to risk choking it off by raising interest rates too early or too fast."

He is predicting that rates will reach 1% by the end of 2015 and 2% by the end of 2016.

Policymakers have repeatedly stressed that while the recovery is moving in the right direction, they want to see the overall economy become more balanced.

There was some encouraging news last week when a breakdown of gross domestic product for the fourth quarter of 2013 revealed a surge in business investment, suggesting the economy is becoming less reliant on consumer spending.

The data from the Office for National Statistics showed that business investment rose by 2.4% quarter on quarter in the final three months of 2013 while upward revisions to previous estimates meant it had also increased for four quarters in a row for the first time since 2007.

The figures were released alongside the second estimate of gross domestic product (GDP) for the fourth quarter of 2013, confirming that growth remained unchanged on last month's projection at 0.7%.

This marked a slight dip on the 0.8% seen in the third quarter.

Economic surveys have also signalled a resilient start to 2014 despite the extreme wet weather, with c losely-watched Markit/CIPS purchasing managers' index readings over the past week showing firm growth in activity across the services, manufacturing and construction sectors in February.

The Bank first slashed rates to 0.5% in March 2009 to combat a deep recession triggered by the credit crunch and subsequent global financial crisis.

It launched its £375 billion quantitative easing programme to pump cash into the economy at the same time.

While the economy is now in recovery, output remains 1.4% lower than its pre-recession peak following a long period of stagnation.

But the Bank is expecting sharp growth this year, upping its forecast to 3.4% last month from 2.8%.

With inflation having now fallen below the 2% target for the first time in more than four years, the Bank has been given breathing space to keep rates lower for longer to help ensure the recovery remains on track.

James Knightley, economist at ING Bank, said: "It is clear that the Bank wants to see monetary policy stay as loose as possible for as long as possible to ensure the economic recovery is sustainable.

"However, the strength of the growth story, coupled with the robustness of the labour market, means that the Bank is likely fighting a losing battle in convincing financial markets that rate hikes are a distant prospect."

Ipsoregulated

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